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Jeff Moore, sr. managing dir., CB Richard Ellis

                                            Click here to read Jeff Moore's bio.
‘Things don’t need to be good to reverse – just better than expected.’
With each passing month, the unemployment numbers seem to look bleaker and bleaker, and almost every day, another major American company announces planned layoffs by the thousands. Here in Orange County, the mortgage industry meltdown that began in late 2007 resulted in the loss of thousands of local jobs, and in November, we saw a decrease of yet another 35,000 jobs.
 
So what does this mean for our local office market, which relies on job growth as an indicator of the absorption of office space and when will it start to turn around?
 
Those were the million-dollar questions that many experts in the commercial real estate industry attempted to answer earlier this month at the annual RealShare Orange County conference. I had the pleasure of sitting on a panel discussing the office market and where it’s headed, and thought I would share some of the highlights.
 
First, job losses inherently mean lower office absorption, higher vacancy rates and lower rents. In 2008 thus far, we’ve seen 1.4 million square feet of negative net absorption, and the vacancy rate stands currently at 15.4 percent. Adding sublease space into the mix, the availability rate in Orange County now exceeds 20 percent.
 
While in the short term these numbers will likely tick higher, there is some good news that led many of the panel experts to give a guardedly optimistic view for 2009.
 
•    We have a diversified economy in Orange County, and some sectors are continuing to show strength, including gaming, bioscience and medical, and law firms (especially those with a bankruptcy practice).
•    The recent FDIC lease at Irvine Spectrum is expected to bring 600 new jobs to the region.
•    There is no significant new construction in the office sector planned for 2009.
•    Lease transaction volumes are relatively steady, although lease terms are shorter and smaller.

Overall, the consensus at the RealShare Orange County conference was that the Orange County office market is facing another rough year in 2009, but there are some bright spots: Prices are cheaper; interest rates are low; and there will be a new direction in Washington, and therefore, hope for a change of course. As someone said: “Things don’t need to be good to reverse – just better than expected.”
 
Ultimately, a market rebound will depend largely on how effective our policymakers are at managing the economy, creating jobs and restoring liquidity to the market. The billions of dollars policymakers are throwing into the economy will hopefully restore confidence in the market, even if it has a long-term effect on inflation. As a fireman friend said: “When putting out a fire, you don’t worry about the water damage.”
 
 

Our family trip to Kansas
I am on a plane in flight home from a weekend college tour with my youngest daughter, Jill. What a great experience it was. My father-in-law went to the University of Kansas and played football there in the 1948 Orange Bowl. He is a die-hard Jayhawk, and we personally have a fun rivalry. I moved from Chicago to Kansas City to start high school and attended college at Kansas State on a baseball scholarship. Although I met my wife when I moved to California after college, there is irony in my similar background to her father. My oldest daughter Jaime attended USC after high school graduation and although Jill may do the same, she is open to exploring different schools and experiences outside of California. That was our basis for our weekend to Kansas!

My father-in-law wanted to make this a memorable weekend and potentially recruit some KU Jayhawks from Southern California. What initially started as a weekend trip that included my wife, daughter, father-in-law, mother-in-law and me, soon grew threefold. First, my wife’s sister, husband and two children, both high school juniors, decided they would come and check out the campus. Then my daughter invited two of her friends and fellow cheerleaders at Tesoro High School, plus two of her male friends that are football all-stars at Tesoro. Tesoro is an 8-0 team this season and ranked the top high school team in Orange County. The guys wanted to check out the football program. Oh, did I mention that the two moms of the cheerleaders decided they wanted to come and be part of the fun? Our group from the Golden State, now totaled 15 as we headed to America’s heartland. What made their weekend even more special was that it was the University of Kansas vs. Kansas State football game rivalry. We would all attend the game, and both my father-in-law and I could wager on behalf of our alma maters for bragging rights.

As I now fly home, I cannot describe the inner joy and satisfaction I feel from the time spent with family, friends and loved ones. The Californian’s were able to experience the excitement of a traditional college football rivalry in the Big 12 Conference and explore a beautiful campus with old brick and limestone buildings nestled on top of a hill, overlooking the Kansas River. The weather was unusually cooperative for this time of year – in the 70s during the day and 60s in the evening. Despite the warm weather, the glory of the Midwestern fall surrounded us with leaves of gold and orange on the forested slopes of the university and valley below. The boys got to meet the coaching staff (my father-in-law arranged it through his connection) before the big game and met some of the players. The girls were able to meet with the cheerleading coach and some of the squad after the game. We drove around campus and saw the magnificent homes and stately lawns of the fraternities and sororities of KU. Of all the colleges I have visited, I think none equal the size and beauty of Greek system housing here.

Out of the seven high schoolers in our group, who knows if any will actually go to school at KU. Driving to the airport, I surveyed the teenagers and the results were interesting; one said KU is his first choice, all four girls said it’s a maybe, one boy said maybe and one said he wants to stay in California. An interesting survey, I thought, from six California-born-and-raised kids and one football player who actually lived in Kansas City when he was younger.

Tomorrow, I go back to the office to meet the business challenges we face today in a struggling economy and uncertain real estate market. I love my job and the people I work with, but I have to say that all of us need to recharge our soul and revisit our past like I did this weekend. Seeing the university through the eyes of my daughter and her high school friends allowed me to revisit a part of my past long lost. It was good to have it back – if only for a few days.

Commercial real estate market is active, though leasing behaviors are somewhat conservative
Real estate market reports for the third quarter are now complete, and the data shows that local businesses helped fuel the commercial real estate transaction pipeline in Orange County, even as the financial markets entered uncharted territory nationally.

While CBRE’s latest MarketView reports show continued negative absorption in both the office and industrial sectors in the third quarter, the good news is that lease transaction volume in both sectors continued at a steady pace – although average square footage and lease terms were down from a year ago.  
 
There’s no question real estate decision makers associated with larger tenants and institutions are operating conservatively and demonstrating a concerned outlook.  At the same time, in the third quarter we saw local businesses continuing to move forward in signing new leases and investing in small buildings and condos. While this is encouraging, the market remains very cautious about the potential effects of the national economy on local businesses.
 
In reaction to economic conditions, we’re also seeing the amount of sublease space on the market in the office sector continue to increase – up 6 percent this quarter. While some of this can be attributed to the continuation of mortgage company attrition in the market, the sublease statistics also indicate that as local companies cautiously move forward with operating their businesses, they are doing so with less people, causing industrial and office tenants to downsize and/or relocate to smaller quarters, and put a portion of their space on the market for sublease.
 
Obviously it will take a lot of small to mid-size deals to absorb the space we currently have available in Orange County, but the cautious optimism of local businesses speaks to our long-term ability to weather the current storm that is playing out now on the national and global economic stage.
 

Consumer confidence will be key factor in how economy moves forward
It’s been a wild couple of weeks in the financial markets – no matter who you are, what industry you work in or what community you live in, we’re all feeling uneasy right now. It will be some time before we know what it all means to our businesses and our personal finances. We’re bracing for the worst, but hopeful that the financial turmoil will be effectively managed by the federal government’s proposals and that we will avoid more serious instability.
 
Here in Orange County and across the country, the retail sector has been on the front lines, feeling the brunt of the storm for much of 2008. I recently attended the ICSC (International Conference of Shopping Centers) conference in San Diego, an annual event that serves as a kind of unofficial industry kick-off for the all-important holiday season. Usually a time of excitement, the mood was more cautious and uncertain this year. Sales are down. Expansion plans across the board are being reassessed. And retailers are bracing for what is expected to be one of the toughest holiday seasons in recent history.
 
While waning consumer confidence and reduced spending are creating a challenging retail marketplace, there are some bright lights in the sector. Category leaders are faring better than some of their smaller competitors, and in primary locations, restaurants are still highly competitive and experiencing strong sales. And as consumers focus on getting back to basics, discount value stores, theaters, yogurt shops and drug stores are among the most active segments of the market.
 
Like the rest of us, retailers are going to watch and see what happens in the financial markets over the coming days, weeks and months. Much is at stake, and consumer confidence will be a key factor in how our economy moves forward. As a result, there’s no doubt the upcoming holiday shopping season will be closely watched for signs of what to expect in 2009.
 

Hunker down and get to work...
In my last blog, I talked about the changing nature of real estate deals in today’s challenging market. As I face the realities of these challenges each day, I keep coming back to a quote that I heard not too long ago: “Don’t try to avoid the storm. Learn how to work in the rain.”

As a regional manager of more than 100 brokers specializing in everything from retail to office to industrial product, it’s my job to help them figure out how to be successful in spite of the current economic storm overhead. This is not a challenge that is specific to real estate; rather it’s one that leaders in all industries across Orange County face in today’s economy. Unfortunately, there’s no magic bullet answer that tells us how to adapt and survive until the market turns around. Still, one thing is clear:  We can’t do business the way we traditionally have for the past several years; we must change our model and focus on the new opportunities that will open up. It may sound cliché, but now is the time to work harder and smarter.   
The business environment has, perhaps, been too easy for many the past decade, especially those who have never lived through a down market. The real estate business – and the economy in general – are cyclical, and those of us that have been in the trenches for 15 to 20 years or more, understand this concept clearly.  
The truth is, those that have not been able to make money in commercial real estate during the past five years, will not likely survive the next five. When I was a young broker in the late 80s and early 90s, I recall my peers and I would regularly work 12 hour days, Monday through Friday, and half of the day on Saturday. Somehow, that work ethic has been lost in the complacency of a market where deals were a dime a dozen. This just isn’t the reality of the market any longer. Today, the only way to be successful is to hunker down and get back to basics. Those who put in the time, and are creative enough to find the opportunities and turn them into deals, will continue to thrive and prosper, while those who aren’t willing to do the heavy lifting may end up being part of the inevitable attrition in our industry in the next year or two.

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